PROBLEM 7-16 Comparing Traditional and Activity-Based Product Margins LO LO7-5 Hi-Tek Manufacturing, Inc., makes two types of industrial component parts-the B300 and the T500. An absorption costing income statement for the most recent period is shown: Hi-Tek Manufacturing Inc. Income Statement $2, 100,000 Sales 1,600,000 Cost of goods sold . .... 500,000 Gross margin . .. Selling and administrative expenses 550,000 . . . . (50,000) Net operating loss $ Hi-Tek produced and sold 70,000 units of B300 at a price of $20 per unit and 17,500 units of T500 at a price of $40 per unit. The company's traditional cost system allocates manufacturing over- head to products using a plantwide overhead rate and direct labor dollars as the allocation base. Additional information relating to the company's two product lines is shown below: B300 T500 Total Direct materials . . .... $436,300 $251,700 $ 688,000 Direct labor . ... $200,000 $104,000 304,000 Manufacturing overhead . . . . . . . . . 608,000 Cost of goods sold $ 1,600,000 The company has created an activity-based costing system to evaluate the profitability of its prod- ucts. Hi-Tek's ABC implementation team concluded that $50,000 and $100,000 of the company's advertising expenses could be directly traced to B300 and T500, respectively. The remainder of the selling and administrative expenses was organization-sustaining in nature. The ABC team also distributed the company's manufacturing overhead to four activities as shown: Manufacturing Activity Activity Cost Pool (and Activity Measure) Overhead B300 T500 Total Machining (machine-hours) .. $213,500 90,000 62,500 152,500 Setups (setup hours) .. 157,500 75 300 375 Product-sustaining (number of products) ....... 120,000 2 Other (organization-sustaining costs) ........ 1 17,000 NA NA NA Total manufacturing overhead cost . . ..... $608,000